A side note on associations and taxes

If an association pursues a tax-privileged purpose, certain income is not subject to corporation tax:

Activities carried out by non-profit organisations that do not pursue economic goals are not taxable. This must be income that the organisation receives without providing anything in return and includes, for example 

• Donations, government subsidies, and ("genuine") membership fees that are not matched by any consideration from the organisation;
• Donations;
• The distribution of information leaflets free of charge without any associated income;
• Free events such as lectures, courses, and workshops.

If the association pursues economic objectives with its specific activity and its income is matched by a consideration, it operates as a commercial business. Income from this may be taxable under certain circumstances. It depends on which of the following three types of economic activity the association carries out: 

• The association operates indispensable business operations: this economic activity is directly related to the purpose of the association and is necessary for it to achieve this purpose. It is therefore tax-free (e.g. performances by a theatre association).
• The association operates dispensable business operations: although this activity is related to the purpose of the association, it is not absolutely necessary for achieving the purpose of the association (e.g. sale of drinks before theatre performances, small association parties, theatre performances in return for a free donation). It is important that any surpluses generated in this way are, in turn, used exclusively to promote the charitable purposes of the organisation.
• The association operates a commercial business that does not qualify for preferential treatment: this business serves exclusively to raise money.
  • If the turnover of such a business exceeds €40,000, the organisation must apply for an exemption. This is because it is necessary to check whether the remaining part of the organisation is still only active on a non-profit basis. 

Membership fees that are offset by a consideration are part of the commercial business operations of an association ("non-genuine" membership fees). These membership fees are therefore subject to corporation tax. The same applies to free donations that are given in return for a service 

Example: An association runs a dance studio. For a monthly membership fee of €50, members can attend workshops and dance training sessions. This is a "non-genuine" membership fee.

A tax-privileged association must pay tax on profits from its dispensable and indispensable business operations if these exceed €10,000. Corporation tax is 23% of this profit. 

Info: Tax-privileged associations are only subject to "limited" corporation tax. If they receive a "random profit" from indispensable business operations, this is not subject to corporation tax.

For pure association activities—without an exchange of services—there is no VAT liability. Associations are therefore not subject to VAT for the receipt of genuine membership fees, gifts, donations, or subsidies.

VAT liability can only arise for income from the commercial business operations of the association. Whether VAT must be charged for a specific service depends on the type of activity: 

• Income generated in the context of indispensable or dispensable business operations is exempt from VAT, regardless of the level of turnover. This is because it is assumed that the organisation has no intention of making a profit ("hobby presumption");
• Income from activities that do not qualify as tax-privileged is exempt from VAT if the turnover does not exceed €7,500 within one tax year. 

Info: If companies do not aim to make a profit from an activity, this is referred to as a "hobby". Income from this is therefore not subject to VAT. It is assumed to be a hobby if the turnover of a company is regularly less than €2,900.

If associations are exempt from VAT, they are not entitled to deduct input tax. 

However, it can be financially advantageous for associations to become registered for VAT: this is because, in most cases, they will hardly have any income subject to VAT but will mainly receive VAT-exempt income from subsidies, donations, and genuine membership fees. However, if they are not VAT registered, they cannot claim input tax and save on operating expenses. 

If an association wishes to become VAT registered, it can waive the hobby presumption by either submitting advance VAT returns and annual returns or waiving the small business exemption. However, the €2,900 limit must still be observed.

In the case of losses from activities that are closely related to personal activities, such as the management of sports and leisure facilities or other luxury goods, or the management of owner-occupied houses or apartments, it must be proven that this is not a hobby. Management must provide the following evidence:

Proof that the organisation's activities cover its costs. State subsidies may be recognised as income, but not genuine membership fees and donations. 

Organisations which are financed entirely by subsidies cannot be subject to VAT. If they wish to become VAT registered, they must provide evidence of their own entrepreneurial income.

If the tax office accepts the refutation of the hobby presumption, VAT is payable. Associations can then claim input tax deduction, but must charge, calculate, and pay VAT to the tax office for their business services.

However, even in this case, genuine membership fees, donations, and gifts are not subject to VAT if there is no consideration in return.

Example: A theatre association puts on a performance. It asks visitors for a voluntary donation. This income is subject to VAT because the donation is matched by a service in return.

Example: To become a member of a theatre association, members must pay €100 per year. The €100 are not matched by any consideration. They are not subject to VAT.

Please note that certain services provided by non-profit organisations are exempt from VAT. If there is no special exemption, the VAT rate for services from dispensable and indispensable operations is 10%. The regular tax rate of 20% is applied to business operations that do not qualify to be tax-privileged.

The small business regulation also applies to associations: sales of up to €35,000 are exempt from VAT. This means that the association does not have to charge VAT, but it also cannot reclaim any VAT paid as input tax. 

However, the association can—just like people who are active as entrepreneurs—apply not to benefit from the small business regulation. To do this, file an application with the tax office requesting that standard taxation be applied. In this case, all income (with the exception of genuine membership fees, subsidies, and donations) is subject to VAT. The association is bound to standard taxation for five years.

Both members and non-members can work for the association on a voluntary or paid basis:

• Officials (board members and accountants) generally fulfil their roles on a voluntary basis. They are therefore not paid for their work in the organisation.
  • The organisation can offer them a tax-free, flat-rate expense allowance of €75 per month (without proof of expenses) as well as tax-free travel and travel expense allowances. Meal costs should not exceed €26.40 per day or a maximum of €13.20 for activities lasting up to four hours. Reimbursement of travel expenses may be granted for journeys taken using public transport, provided that the costs are evidenced, plus a travel allowance of €3 for journeys of more than 4 hours (€1.50 for journeys of up to 4 hours). If mileage is also invoiced, this must be reduced by the travelling expense allowances thus granted.
  • This lump sum applies per association: people who are members of several associations and work on a voluntary basis can receive the lump sum several times.
• If officials are employed by an association and receive a salary, they cannot receive a lump-sum expense allowance. The regular provisions on income tax and social security for salaried employees apply to them.
• Organisations can also engage other people on the basis of a contract for work and labour. As this person is self-employed, the association neither has to pay income tax nor social security contributions.

Info: See the chapters on labour law and social security to find out about these topics in detail.

Example: An independent theatre group is structured as an association. The board members also work on a theatre production. For the duration of the rehearsal and performance period, they can conclude an employment contract (employed activity) or a contract for work and labour (self-employed activity) and be paid for their work, just like the other members of the ensemble who are not members of the association.

Associations are obliged to keep proper records of their income, expenses, and assets.

There are exemptions for small associations. An association is considered to be small if its income or expenses does not exceed €1 million in two consecutive years. Small associations only need to prepare the following documents:

• Income and expense account (see the section on profit calculation);
• Balance sheet: in this, the organisation provides a list of its assets and liabilities;
• The association must truthfully provide the tax office with all relevant tax information. If an association starts commercial, taxable business operations, it must notify the tax office within one month. 

Info: Assets include things like operating and office equipment, cash in hand, bank balances, and receivables from other parties. 
Liabilities are debts and provisions. If companies assume that they will have to settle a debt in the future, but the level of debt is not yet known, they set money aside for this purpose as a precaution. Companies therefore create provisions. This guarantees that sufficient money will be available later to settle the expected debt (e.g. for tax refunds).

The association’s management must prepare the income and expense account and balance sheet within five months of the end of the financial year and submit them to the tax office. These documents must be kept for 10 years.